It's been two months since our last article and what a wild and interesting two months it's been!

For starters, the New York gold conference was filled with excitement and enthusiasm last month,
especially since gold was hitting a new bull market high. It then went on to close at a 7-year high on September 24. But on October 3, gold fell sharply, marking the end of the intermediate rise we call C.

GOLD: Correcting in a bull market

Based on average historical timing, the rise was due to end in mid-October with gold near the $415 level. But even though it was a couple of weeks short and gold didn't reach $415, it was a good, normal C rise and it fulfilled its primary objectives based on timing and by hitting a new bull market high. So all is well.

Most important, gold's been in a solid bull market since reaching its lows in 2001, almost three years ago, and it's been performing like it usually does in a bull market. For now, gold will likely correct downward in what we call an intermediate D decline, which is normal in any market following a strong rise, and it'll then head higher, probably until at least next year and possibly longer.

The bottom line is, gold is hot, and gold and silver shares have been even hotter this year, reaching a six-year high. This alone is impressive for a bull market that's barely gaining notoriety and we're planning to stay invested in gold and gold shares as long as that's the case.

FUNDAMENTALS ARE SOLID

Newmont Mining is the world's largest gold mining company and it moves closely to the XAU and HUI gold share indexes. Its president, Pierre Lassonde, believes gold is rebounding from a 20 year bear market that began with a war on inflation in 1980, and ended with a war on terrorism and a loose fiscal policy that is flooding the world with dollars. Plus, the 20 year bear market weeded out marginal gold producers and cut down production.

On the demand side, we have China and India who are prospering and understand the power of gold. India, home to a billion people, is increasingly buying gold. He adds, China by itself could become 40% of the entire gold market, which is the most important thing that's happened to gold in the last five years.

China has been deregulating gold. A year ago, the Shanghai Gold Exchange opened and started free trade in gold for the first time in China's history. More recently, China's allowing its 1.3 billion citizens to buy gold. Considering the high savings rate in China, gold is a logical investment and it's estimated that a $36 billion equivalent in Chinese private money could move into gold. Plus, the Chinese government is moving to increase its low 2% gold reserves. And it certainly makes sense when you consider the huge dollar reserves that're piling up.

Gold demand looks very bright and we believe a golden era is starting, which in many ways is similar to the early 1970s. In other words, gold is still cheap.

GOLD: Step by step bull market also technically solid

For now, gold's steps are solidly in place and as long as they continue, the bull market will provide us with ongoing profits. Chart 1 shows the big picture steps since 1981. As you can see, the gold price moves in a major 1 through 4 cyclical pattern. Briefly, the #1 rises are the best bull market rises and gold's been rising in a #1 bull market rise for 2 years now. It formed a #4 low in February, 2001 and it was the first #4 low that didn't fall to a new low like the others did. This was the first step in the change.

Gold then rose above its 65-week moving average, its major trend identifier, in August, 2001 where it has stayed since then. This provides solid bull market support at $342. Last December, gold completed its next major step when it rose above its prior #3 peak at $330 for the first time in over 20 years. This was very important because gold moved into a higher level of the bull market.

Gold's current higher level is between $330 and $415, which was the prior #1 peak in 1996 and the #3 peak in 1999. With gold reaching a new high in September, the bull market is getting closer to the higher side of the band. As long as gold stays above $342, our next target is $415. A break above $415 means gold would be moving into an even higher level of the bull market, which would be very bullish.

Read more by the Aden Sisters in GOLD: THE COLOR OF HOPE ...Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.